China's internal pathology
In the Chinese market, electric cars can be found for €10,000. An equivalent American model costs €30,000. China dominates 80% of the solar energy market and, in 2024 alone, installed 277 gigawatts of solar capacity, more than five times the amount installed in the United States during the same period. To a large extent, China's expansion is a consequence of its state-run, planned economy. Years ago, China focused on the production of coal, cement, steel, and other raw materials. Today, it's consumer goods and advanced technology.
The Chinese domestic market is characterized by its stability. Thus, episodes of overproduction—when they occur—inevitably end up being channeled toward exports, a shift that harms both the global economy and the Chinese economy itself. After production peaks in specific sectors, the Chinese state can—and has done so repeatedly—decide to suddenly eliminate production incentives to "normalize" the market. This happened with solar energy and is currently happening with electric vehicles.
Communist Party officials have one priority above all others: growth and job creation. Therefore, the central incentive is not the profitability of companies, but their growth, which explains a large part of the fluctuations in production. When overproduction leads to lower prices, companies' investment in R&D suffers and wages are reduced. Furthermore, it is private companies, more so than public ones, that generate the largest volume of production and, therefore, bear the greatest responsibility for correcting imbalances.
The Chinese model prioritizes production volume over quality, a bias reinforced by its institutional architecture. As in the US and the European Union, in China VAT is paid where the activity takes place, not where the product is consumed. The tax system favors the concentration of industrial activity in specific areas and sectors, such as electric vehicles, batteries, and solar panels. Although tax revenues are split roughly 50/50 between the central government and regional governments, local incentives continue to reward production over profitability. State-owned land has been used as a tool to attract industrial investment. This policy contributed to the creation of a real estate bubble which, when it burst, reduced revenues from land sales from approximately $1.3 trillion in 2021 to around $670 billion in 2024. The heavily regulated Chinese banking system completes the picture. Banks favor lending to companies with low margins and low risk, without particularly incentivizing innovation. In this context, foreign direct investment has fallen significantly: from approximately $67 billion in 2021 to $19 billion in 2023, with a growing absence of investors in large projects. The tax burden on medium-sized companies, which can reach 59% in effective terms—compared to 37% in the United States—further reinforces an economy driven more by volume than profit, with visible consequences for economic stability. For example, in the automotive sector, this dynamic has translated into a series of price reductions to maintain sales: 95 models in 2022, 148 in 2023, and 227 in 2024.
Local governments tend to support low-profitability companies because they generate tax revenue. In a highly state-controlled economy with high taxes, competition ends up being tougher than in a free market, since economic agents have fewer degrees of freedom.
The Chinese Communist Party has a guiding principle for its five-year plans: "Invest early, invest small, invest long-term, invest in technology." The principle is useful, but it lacks the support of the financial system. Only about 30% of capital comes from non-bank markets, half that of the US and a problem also present in Europe. There is little capital available in bonds, convertible loans, or venture capital, and this is a specific loss, especially given that capital from domestic savings represents a massive 43% of GDP, much higher than in Europe.
Added to this is the still limited protection of intellectual property, which does not sufficiently guarantee clear economic returns for originality.
The mechanisms essentially linked to technological development function in China, but capital rigidity and recurring overcapacity spikes—a consequence of flawed planning—constitute an internal pathology that periodically produces negative effects. The transition from volume to quality, from size to innovation, and from investment to profit is as necessary as it is difficult in a state-controlled economy.
The great architect has just died. Frank Gehry, creator of the Guggenheim Museum From Bilbao. The antithesis of Frank Lloyd Wright, master of balance and proportion, Gehry's great challenge—which he managed brilliantly—was working with a space completely lacking in symmetry. Perhaps the Chinese economy needs a Gehry.
